Taxman overruled again!!

The Court of Appeal overrules IRAS again, twice over the last two months.

What is the issue?
Are portable dormitories considered "plants" as per plaintiff being in the business of providing dormitory services or "buildings" as per IRAS?

At a total cost of $2.6 million, the plaintiff had built and operated 6 blocks of three-storey container-like as temporary workers' accommodation and administrative use within an industrial estate. Each block was made of "steel beams held by nuts and bolts while panels were inserted within this steel framework to form walls. "The floor was made of timber and each dormitory was topped with a metal roof".

Decision and Basis
IRAS has been told by the Court of Appeal to treat such portable dormitories as "plants".

The three-judge court led by CJ Chan Sek Keong overruled the earlier decisions of Income Tax Review Board and the High Court and defined such assets as "plant" on the following criteria:-

• built on prefabricated materials
• could be dismantled and moved elsewhere within 90 days' notice

The Court of Appeal concluded that the definition of plant would depend on "its exact operational role in the taxpayer's business, its characteristics and the precise factual matrix and context concerned".

Leung Yew Kwong and Tan Shao Tong from WongPartnership, lawyers for the Plaintiff, had argued that their client's business of providing dormitory service involved moving and reusing such assets in other sites in the future. [The same team from the same law firm won in the Nov 2010's case.]

IRAS' lawyers, Irving Aw and Quek Hui Ling, had relied on past rulings of similar situations. They cited a specific example where circus tents functioned as premises and would not qualify as plants.

To the plaintiff, the decision could now claim for tax relief and secure "a tax savings of at least $500,000 based on 2004 tax rates".

In my humble opinion, it is a difficult issue for IRAS as acknowledged by Judge of Appeal Andrew Phang. The law does not provide the definition of "plant" (as such words from my tax lecturer still echo in my head after years) and the three-judge court had to dwell on its precise definition in arriving at the decision.

Source - K.C. Vijayan, "Court of Appeal overrules taxman", The Straits Times, Dec 18, 2010.

Court overrules tax authority

can you pick up customers in yellow box?

What is the issue in dispute?
The company is in the business of leasing aircrafts. The company has subsidiary firms in Cayman Island. The subsidiary firms bought aircrafts with loans pegged to floating interest rates. The aircrafts are rented out to airlines on fixed rental rates.

The subsidiary firms are supposed to use the rental proceeds to service the interest obligations. Often, the firms face revenue shortfall to meet those obligations.

The Singapore parent then entered into interest rate swap arrangements with banks in Singapore to hedge against the risk of floating interest rates on behalf of its subsidiaries. During the 17-month period from October 2006, the Singapore parent company made payments to its subsidiaries overseas as part of interest rate swap arrangements. 

IRAS's position

• IRAS has taken the position that these interest payments overseas are subject to withholding tax under provisions dealing with loans borne by the parent firm.
• The Comptroller argued that such broad interpretation of the relevant section for such payments to be taxable has been accepted by tax advisers, practitioners and businesses in the past.

P/S - The name of legal counsel representing IRAS was not mentioned by K.C. Vijayan, the ST law correspondent.

The Singapore parent's position

• The tax authority has taken a too broad an interpretation of the law.
• Such braod interpretation may actually discourage foreign investors from doing business in Singapore.

P/S - Leung Yew Kwong / Tan Shao Tong from WongPartnership represented the plaintiff.

High Court - Justice Andrew Ang
The Court ruled in favour of the Singapore parent on the following grounds:-

• interest rate swap payments are not subject to withholding tax under s12(6)(a) of Income Tax Act
• the payments were not in relation to any loan borne by the firm here
• IRAS has taken a too broad an interpretation of the law
• past acceptances by tax advisers, practitioners etc should not be cited to justify an interpretation of the law

The ruling would mean that the Comptroller of Income would have to make substantial refund and pay costs to the Singapore company. The costs to IRAS could go higher when business entities which were involved in similar situations and had paid the taxes may now seek a review with IRAS given the ruling.

Reference - K.C Vijayan, "Court overrules taxman, orders refund for firm", Straits Times, Nov 6, 2010.

Biggest GST fraud in Singapore

$5,695,823.65 being the tax undercharged.
Then multiply that amount by 3 to arrive at $17,087,470.95 penalty payable.
In return for that "contribution", the person responsible gets 54 months of free food and free lodging in prison.

Who gets such "honours"?
The man is none other, Mr Mahesh Sukhram Daswani.
He was in the business of trading mobile phones. He subsequently found it more lucrative to "manage" (ie. forge) his business records very aggressively.

First;y, he under reported his sales ie. collected output GST from his customers and decided to keep a lot for himself.
Secondly, he kept himself busy with creating detailed but "fictitious" purchases. He probably used photoshop (just kidding) to digitally alter zero-rated suppliers' invoices to standard-rated. He then directed his staff to include those invoices in the quarterly claims.
Thirdly, he had to go create export documents to show that the mobile phones had been exported. Export sales, remember is zero-rated. I guess he was trying to show how he was able to dispose off millions of dollars of phone purchased.

The trickeries of Mahesh are not new but definitely not sustainable.

1. IRAS would definitely be paying attention to who have been issued millions of dollars of refund cheques. A request for audit of the respective taxpayers' books would be good practice.
2. In the press release, it was specifically highlighted that IRAS has used a lot of technologies to nab Mr Mahesh. Phrases such as "advanced computer forensics techniques", "computerised analysis programmes" and "specialised computer forensic tools" were deliberately informed to public. Perhaps IRAS colleagues have exchanged notes with their colleagues in Commercial Affairs Department.

The moral of the story (as always) - Please don't try to muck around with your GST returns.

Property tax today and 2011

Marina Bay's construction from my car

On the 13th July in The Straits Times’ Forum, Ms Deanna Choo, Director (Corporate Communications) of IRAS responded to Mr Paul Chan’s misconceptions (3rd July) below:-

1) He thought IRAS estimates the annual value of properties based future market trends.
2) He also felt that increases in the annual value of a property based on market rentals were not right for owner-occupiers.

IRAS responded as followed:-
1) “The property tax is pegged to the annual value of the property, which is determined based on market rentals of similar properties prevailing at the time of assessment. It does not take into account any forecast or estimate of future movements in market rentals.”

2) Property tax is a tax on property ownership ie. regardless of whether the property is tenanted. Income tax is imposed levied on rental income from properties that are rented out.

IRAS is of the opinion that property tax calculated against current market rentals (as against transacted property prices) is relatively more stable to homeowners.

Question for IRAS – Can share with us on how you collect information on current market rentals?


Future changes
The Government introduced in Budget 2010 a progressive property tax schedule for owner-occupied residential properties from 1 Jan 2011.

Currently, home owners who are eligible for the owner-occupier concession pay property tax at a flat rate of 4% on the Annual Values of their properties. Owners of non owner-occupied residential properties and other properties are taxed at 10%.

Will you as a homeowner be expected to pay more or less on property tax?

Based on IRAS estimates, all HDB flat owners and the vast majority of residential property owners will enjoy an effective property tax rate lower than 4% of annual value under the new method. IRAS has done some calculations to demonstrate how and why most of us would be paying less property tax in e-Tax Guide cited below.

For owner-occupied properties,

• If your annual property value is $6,000 or less, you pay nothing under existing and new 2011 law.
• If your annual property value is $24,000, you would enjoy $240 tax savings.
• If your annual property value is $80,000, you would pay $60 more than under current law.

Reference
IRAS e-Tax Guide - http://www.iras.gov.sg/irasHome/uploadedFiles/Quick_Links/e-Tax_Guides/Property/e-Tax%20Guide.pdf
The Straits Times, July 13, 2010

Company director jailed for GST fraud

What happened?
Tang Ee Boon (“Tang”), 32, the managing director of V-Teb Services Pte Ltd (“V-Teb”) was convicted of GST fraud amounting to $327,837.49 and was sentenced to 12 months' jail. Tang was brought to court for 21 charges of making inflated and false claims of GST refunds for the period 1 Jan 2004 to 30 Jun 2007.

Rule
GST-registered businesses can offset the GST they pay on their purchases (input tax) against the GST they collect from sales (output tax), and pay the net difference to IRAS. If a business incurs more GST on purchases (input tax) than it collects from sales (output tax), it can claim the difference as GST refund from IRAS.

What went wrong for Tang's ploy?
V-Teb provides cleaning services locally. By nature of his business, the company is not expected to claim GST refunds.

However, IRAS’ tax auditors noted a pattern of submitting increasing amounts of GST refund claims in the GST returns on a frequent basis. IRAS actually verifies the value of V-Teb’s taxable purchases with the alleged suppliers.

What did Tang get for his mischiefs?

Tang pleaded guilty to a total of 14 charges of evading GST,

• comprising three charges of understating output tax,
• eight charges of overstating input tax, and;
• three charges of making false entries in V-Teb’s GST returns.

In addition to the jail term, the court also ordered Tang to pay a penalty of $983,512.47, which is three times the amount of GST undercharged.

Source - www.iras.gov.sg - Edgar basically paraphrase/paragrapg the original article.

What can I do with trade loss, unabsorbed capital allowance and donations?

I have summarised the article by Mr Clement Tan Kai Guan entitled "Order of Claiming Qualifying Deductions - Maximising Tax Benefits" published in Singapore Accountant, June 2010.

Question - When a taxpayer incurs a trade loss for the current year and has current year unabsorbed Capital Allowances (CA) and approved donations, what options does he have with regard to the utilisation of these qualifying deductions?

Answer

1. Prior to YA2003, you can ONLY carry forward the current year unabsorbed CA, losses and donations for setoff against his future years' taxable profits.

2. With effect from YA2003, group relief option was introduced.
Loss making Singapore incorporated companies are allowed to transfer their current year qualifying deductions to other profitable member companies of the same group.

3. From YA2006, the carry-back clause was introduced.
Any person carrying on a trade, business, profession or vocation may carry back his current year unabsorbed CA and losses, subject to a maximum of $100,000, for setoff against his Assessable Income (AI) for the immediate preceding year of assessment.
Note - Donations cannot be carried back under the loss carry-back option.
(Edgar - In the case of carry-back, there is the possibility of tax refund by IRAS on tax paid on previous year's profit.)

4. In February 2009, the carry-back option was enhanced.
The amount allowed to be carried back is increased to to $200,000 and extending the period of
carry-back from the current 1-year period to a 3-year period.
The enhanced carry-back relief system is only applicable to unabsorbed CA and unabsorbed losses relating to the YA2009 and YA2010.

Rule - Which to apply first?
Group relief first, then carry-back and carry-forward.
CA first, then trade loss.

- Transferred out CA to group companies
- Then transferred out trade loss to group companies
- Lastly transferred out Approved Donations to group companies" height
- Assume Company A first, the Company B
- Any leftovers from Group Relief, then Carry-back.
- Any leftovers from Carry-back, then Carry forward.

Clement made a simple but interesting observation.
He asked us to ensure that the trade loss be used to offset profit before exemption in excess of $300,000 first, if possible. This is due to the partial exemption.

Example - For YA2009 (ie. 18% tax rate), we have Company A with $200,000 profit and Company B with $380,000 profit. Both companies have $80,000 trade loss carried forward. Compare tax payable before and after applying the trade loss of $80,000 for the two companies.

• Company A to pay $10,350 after deducting trade loss or pays $17,550 without deducting trade loss. The trade loss of $80,000 would save $7,200 for Company A.
• Company B to pay $26,550 after deducting trade loss or pays $40,950 without deducting trade loss. The trade loss of $80,000 would save $14,400 for Company B.
  

Moral of story - use the deductions for entity with profit in excess of $300,000 in the current year of assessment or keep for use in future years instead.

Lessons from Raffles Town Club's appeal

nearing completion?

In yesterday's Today, it was reported that Raffles Town Club (RTC) has lost its arguments in the Court of Appeal on the following:-

• failed to obtain tax deductions for the costs involved in leasing its land and in constructing the clubhouse on the ground that $108 million cost of acquiring the land from the State and the $91.4 million incurred in building the clubhouse were capital in nature and therefore
  not eligible for tax deduction;
  
• secondly, it failed to have its membership fees taxed over 30 years, the life span of the club (this is an interesting attempt in defining the timing of revenue recognition and consequently, timing of taxability);
  
• thirdly, it failed to secure relief for YA2001 from the tax department for the $53.28 million in damages it had to pay members after it lost the 2005 class action suit filed by several thousand members who claimed the club had falsely led them to believe they were part of an exclusive establishment and;
• lastly, it failed to secure tax deductibility for the $2.34 million that RTC paid for geomancy fees.
  

Consequently, RTC is liable to pay tax for the Years of Assessment 1998-2003 on the full amount of $526.14 million it collected from its 19,000-odd members who had paid $28,000 each to join.

I have quoted verbatim the learning points from Justice Phang's concluding remarks:-

• "Where ordinary accounting principles run counter to the principles of tax law, they must yield to the latter for the purposes of computing gains and profits for tax."
  

• "Accounting and tax have different objectives in mind. Financial accounting is intended to provide information regarding firm performance to the market place while taxable income is prescribed by the government to meet budgetary needs ... Regardless of how persuasive accounting evidence is, the prerogative still lies with the court to decide whether a particular item should be regarded as income that has accrued for the purposes of liability to tax."

• He pointed out that while accounting treatment focuses on the balance sheet, "taxation requirements are centred on the profit and loss accounts, so that the distinctions between revenue and capital, which are vital for tax purposes, may be lost in the accounting treatment".
  

• Concluding, he said: "I am also of the view that the present case turns on how well-established tax principles and tax law would apply rather than on the correct treatment of the items brought to tax."
  

Budget 2010 - Productivity and Innovation Credit

It was announced in Budget 2010 that a Productivity and Innovation Credit (ie.“The Credit”) will be available for 5 years for Year of Assessment (YA) 2011 to YA 2015. The Credit will provide significant tax deductions for investments in a broad range of activities along the innovation value chain.

On such activities is investing in automation. Of course, IRAS defines "automation" as costs incurred to acquire "prescribed automation equipment" (e.g. laser printer, modem).

You would be entitled to 250% allowance for the first $300,000 of qualifying expenditure, 100% allowance for the balance expenditure.

Example: Laptop costs $2,000
Capital Allowance under the Credit = 250% x $2,000 = $5,000.

Taxpayer can either claim $5,000 as capital allowance in its tax return or opt to convert such capital allowances in respect of Laptop into a cash grant. The cash grant is computed at 7% of the capital allowance under the Credit ie. $350.

Question - Why the flexibility for you to choose to claim or to convert?
The simple answer is taxpayer should claim if it could help to save on paying 17% corporate tax and you should covert to cash if there is very little or no tax payable eg. for new company with exempt income.

Current Tax Trends

Here are the current tax trends and their respective consequences as observed and explained by Lor Eng Min and Ang Lea Lea of Ernst & Young Solutions LLP:-

a) Increased information sharing among tax authorities of different countries
Businesses with operations over several countries would have to be careful in ensuring consistent information being given to the various tax authorities.
[Edgar - The same attitude should be adopted in providing information to various departments within a tax authority.]

b) Tax authorities sharpen their focus on large companies.
As many governments have incurred budget deficits in 2009, enhancing tax revenue collection could be a priority. By focusing on large companies, a significant portion of revenue could be collected very quickly while sending a signal to the rest of market to comply.
[Edgar - Given the advancement in technology and information availability, tax authority now has the ability to drill down and cross reference on companies, big and small.]

c) Shorter filing deadlines
In Singapore, the interval between filing of tax returns and the financial year end of company has been reduced substantially. If your company's year end is Dec 31, 2009, you are to submit your Form C in Nov 2010. [Edgar - Secondly, companies are encouraged to submit Estimated Chargeable Income. Failing which, the authority may present its own preliminary assessment and tax is payable within a month.]

d) Timely and voluntary disclosure requirements
Incentives in term of lighter penalty are explicitly stated to achieve the above.

e) Transfer pricing documentation and Advanced pricing arrangements
Given complex costing and pricing issues between entities in a group, the Group is encouraged to seek a formal understanding on any inter-company arrangement with tax authority.

Reference - Singapore Accountant, Jan 2010.

Gan Oh Boon and Tax Exemption Scheme

A businessman, Gan Oh Boon, warmly embraced the idea from Chng Chor Tong, his auditor, of spreading the profits from his steel forming and rolling business over 6 new companies set up in 2004.

Law - The law exempts new companies from paying tax on the first $100,000 of chargeable income and partially exempted for the next $200,000.

Modus operandi
Company A signs management agreement with each of the 6 shell companies. The profit from Company A is evenly distributed to 6 companies by fictitious expenses (valued $1,6mio) with no work or services performed by the 6 shell companies for Company A.

The fictitious expenses were "correctly named" and comprised of commission fees, technical consultancy fees, marketing consultancy fees, engineering consultancy fees and management fees.

The said fees were for the work and services purportedly performed by the 6 shell companies. Even though these fees were reported as income by the respective shell company, the overall tax burden has been reduced substantially for the Years of Assessment (YA) 2005 to 2007.

What went wrong for Mr Gan in applying the law?
The tax exemption scheme under section 43(6A) of the Income Tax Act, which took effect from YA 2005, was introduced to support entrepreneurship and encourage growth of local enterprises.

But in my humble interpretation, the 6 shell companies are basically shells with no independent employees and resources carrying out its own economic activities.

You can't just create companies to distribute the profits around!!!

What are the punishments?

• For the company, a fine of $24,000 and a penalty of $988,933.58.
• For Mr Gan Oh Boon personally, 2 weeks of imprisonment and a total fine of $8,000.
• In default of payment of the fine, the default sentence would be 6 weeks of imprisonment.
• He was also ordered to pay a total penalty of $988,933.58. In default of payment of penalty, the total default sentence would be 34 months of imprisonment.